Ask Liz Weston

Get smart with your money

Taxes

Q&A: Avoid deducting personal expenses

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Dear Liz: I am the sole owner of a condo. I am getting ready to realize a dream of mine by traveling around the world. I will be gone indefinitely. Thus, I am thinking about renting out my condo. I know I get a write-off for repairs on the unit, cleaning supplies, etc. What about the storage unit where I will need to store my things from my unit. Can I write off the storage unit?

Answer: Congratulations on your upcoming adventure! You’ll have excitement enough without defending yourself in an IRS audit, so avoid deducting personal expenses such as a storage unit.

The IRS says you can deduct the “ordinary and necessary” expenses for managing and maintaining a rental property. That includes mortgage interest, taxes, operating expenses, depreciation and repairs.

“If the storage unit was used in conjunction with the rental activity, such as storing maintenance supplies for doing work on the rental property, a deduction could perhaps be justified,” says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

However, you won’t be around to do that work, so deducting the storage unit isn’t going to fly.

Q&A: Property transfers trigger tax problem

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Dear Liz: I’m considering giving property (a condo) to my child through a quitclaim deed while I am still living. If she continues to live in the condo for two years after gaining possession, doesn’t she get a $250,000 capital gains exemption when she sells the property?

Answer: Yes, if she owns and lives in the home for at least two of the previous five years, she can exclude up to $250,000 of home sale profits from her income. However, her taxable gain would be based on your tax basis in the property: basically what you paid for the home, plus any qualifying improvements. Only if she inherits the home would the tax basis be updated to reflect its fair market value on the date of your death. Although taxes should never be the sole consideration for property transfers, the favorable step-up in basis may be a powerful incentive to hold off. Consider discussing your options with a tax pro.

Q&A: How to reduce the tax penalty from an IRA distribution goof

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Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty. You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account. Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t. Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said. You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.

Q&A: Determining a house’s value

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Dear Liz: I understand that as a widow, if I sell my house I get the stepped-up value from the year my husband died. Should I have gotten an appraisal at that time (26 years ago)? How do I find out what my home was worth then? We bought it in 1973 and he died in 1998.

Answer: In most states, half of a couple’s jointly owned property gets a new, favorable step-up in tax basis at a spouse’s death. In community property states such as California, both halves of the property may get that step-up.

A professional appraisal 26 years ago could have been helpful, although a good appraiser can do a retroactive assessment, said Jennifer Sawday, an estate planning attorney in Long Beach.

Before you hire an appraiser, though, hire a tax pro, Sawday said. The CPA or tax preparer will use the data to file your return, report your home sale and compute any capital gains taxes owed, so find out how they recommend obtaining it.

Q&A: How gifting property before you die gives your kids a tax headache

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Dear Liz: My wife and I have purchased a few properties over the years and now we would like to give these properties to our children. I’ve read that the best way to gift properties is to wait until we pass away, which sounds terrible. Is there any way to transfer or gift properties without paying a huge amount of taxes?

Answer: Yes, although you’d likely be shifting the tax bill to your kids.

Currently you have to give away over $13 million in your lifetime to owe gift taxes. But if you transfer the properties to your children during your lifetime, they will also get your tax basis in the properties.

That means if they sell, they’ll owe taxes on the appreciation that’s occurred since you bought the real estate. If you bequeath the properties at your death, by contrast, the properties get an updated value for tax purposes and the appreciation that occurred during your lifetime isn’t taxed.

Gifting the properties may still be the right choice, but consider talking to an estate planning attorney and a tax pro before proceeding.

Q&A: Qualified charitable distributions

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Dear Liz: This is the year I turned 73, and I’m planning how to take my required minimum distribution from my IRA and 403(b) accounts. I know from a Google search that I can redirect this distribution to charities without being taxed, up to a certain amount. However, the financial services company holding my 403(b) money tells me they can’t do that and won’t engage. They say take the money, pay the taxes, then donate it and take the tax write-off. Why would they make this difficult?

Answer: Because they’re correct. You can’t make a qualified charitable distribution from a workplace retirement plan. That option is available only for IRAs.